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IFRS 9/ IAS 28 — Long-term interests

Date recorded:

IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures — Measurement of long-term interests - Measurement of interests in associates and joint ventures that, in substance, form part of the net investment - Agenda paper 15

Recap

This topic was first discussed in September 2015, as a new item for the Interpretations Committee.  The Interpretations Committee has been asked to clarify whether long-term interests that are part of the net investment should be assessed for impairment using IAS 36 Impairment of Assets or using IFRS 9.   IAS 28.38 sets out the requirements for when an entity’s share of losses exceeds its interest in an associate or joint venture.  IAS 28.38 states that, for this purpose, the interest in an associate includes any “long-term interests that, in substance, form part of the net investment in the associate or joint venture.”  Examples included in IAS 28.38 of such items are long-term receivables and loans, which are financial instruments. In November 2015 the Interpretations Committee discussed various ways in which the requirements could be interpreted: (i) the feedback from outreach activities indicated that there are differing views on how to account for the impairment of long-term interests and that the issue is widespread; (ii)  the main difference between the alternatives is whether long-term interests are subject to the IFRS 9 impairment requirements; and (iii) in the view of the Interpretations Committee members, the scope exception in IFRS 9 regarding interests in associates and joint ventures is not clear in this respect. The Interpretations Committee did not reach a consensus and referred the issue to the Board. The Board discussed this issue in December 2015 and February 2016. The purpose of this session was to provide the Interpretations Committee this analysis and the staff recommendation.

Staff analysis

The staff considered that the requirements of IFRS 9, including those relating to impairment, apply to long-term interests in an associate or a joint venture to which the equity method was not applied because (i) the scope exception in paragraph 2.1(a) of IFRS 9 applied only to interests in an associate or a joint venture that an entity accounted for using the equity method; and (ii) interests, described as long-term interests in IAS 28, were not accounted for using the equity method. Consequently, an entity applied IFRS 9 (including impairment) to long term interests in which the equity method was not applied.

The staff indicated that an entity would account for long term interests as follows: (i) the entity would account for the long-term interests applying IFRS 9, including applying the impairment requirements in IFRS 9; (ii) in allocating any losses of the associate or joint venture, the entity would then include the carrying amount of those long-term interests (determined applying IFRS 9) as part of the net investment to which the losses were allocated; and (iii) the entity would assess the net investment for impairment applying the requirements in paragraphs 40 and 41A-43 of IAS 28.

The staff indicated that the Board was in agreement with their analysis.

Staff recommendation

The staff concluded that the Standard provided an adequate basis to enable an entity to determine how to account for long-term interests in an associate or a joint venture. Consequently, the staff recommended that the Interpretations Committee should not add the issue to its agenda. The proposed wording for the tentative agenda decision was included in the agenda paper.

Discussion

There were significant concerns raised during the discussion. The staff were askedto analyse how to address the issue through an amendment instead of an agenda decision; or to determine whether an amendment would be feasible at this stage.

The most significant concern was related to the lack of clarity of how the mechanics and the calculations would work. It was pointed out that it was not clear how the impairment would be allocated. Another concern was that it was not clear whether the staff analysis was the only valid approach.

The staff indicated that exploring the issue in more detail would involve analysing the equity method, which was beyond the scope of the submission. In that regard, the staff was asked to just consider how the mechanics would work for this particular case.

Another topic was whether a long term investment would be accounted for at cost or at fair value. It was noted out that IFRS 9 required an entity to reflect the management intent while the accounting treatment was clearer under IAS 39.

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